Discover 2015 Annual Report Download - page 92

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to post additional collateral for derivatives positions. In order to anticipate funding needs under adverse environments,
we maintain liquidity stress scenarios that assess the impact of a range of unusual business events, such as severe
economic recessions, financial market disruptions, adverse operational events and other forms of stress.
Credit Ratings
Our borrowing costs and capacity in certain funding markets, including securitizations and unsecured senior and
subordinated debt, may be affected by the credit ratings of DFS, Discover Bank and the securitization trusts.
Downgrades in these credit ratings could result in higher interest expense on our unsecured debt and asset
securitizations, as well as potentially higher fees related to borrowings under our lines of credit. In addition to increased
funding costs, deterioration in credit ratings could reduce our borrowing capacity in the unsecured debt and asset
securitization capital markets.
We also maintain agreements with certain of our derivative counterparties that contain provisions that require
DFS and Discover Bank to maintain an investment grade credit rating from specified major credit rating agencies.
Because the credit rating of DFS did not meet the specified thresholds, we had posted $4 million of collateral with our
counterparties at December 31, 2015. Discover Bank's credit rating met specified thresholds set by its counterparties.
However, if Discover Bank’s credit ratings were reduced by one ratings notch, Discover Bank would be required to post
additional collateral, which, as of December 31, 2015, would have been $73 million.
On November 20, 2015, Standard & Poor’s affirmed its ‘BBB-‘ and ‘BBB’ long-term issuer credit ratings on DFS
and Discover Bank, respectively, and revised its outlook on the ratings from ‘Positive’ to ‘Stable.’
A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal
at any time by the assigning rating organization, and each rating should be evaluated independently of any other
rating. The credit ratings are summarized in the following table:
Moody’s
Investors
Service Standard & Poor’s Fitch Ratings
Discover Financial Services
Senior unsecured debt ...................................................................................................... Ba1 BBB- BBB+
Outlook for Discover Financial Services senior unsecured debt .............................................. Stable Stable Stable
Discover Bank
Senior unsecured debt ...................................................................................................... Baa3 BBB BBB+
Outlook for Discover Bank senior unsecured debt ................................................................ Stable Stable Stable
Subordinated debt ........................................................................................................... Ba1 BBB- BBB
Discover Card Execution Note Trust
Class A(1) ......................................................................................................................... Aaa(sf) AAA(sf) AAA(sf)
Class B ............................................................................................................................ N/A N/A N/A
Class C ........................................................................................................................... N/A N/A N/A
(1) An “sf” in the rating denotes rating agency identification for structured finance product ratings.
Liquidity
We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy
debt obligations under both normal and stress conditions. In addition to the funding sources discussed in the previous
section we also maintain high-quality, liquid, unencumbered assets in our liquidity portfolio that we expect to be able to
convert to cash quickly and with little loss of value using either the repo market or outright sales.
We maintain a liquidity risk and funding management policy which outlines the overall framework and general
principles for managing liquidity risk across our businesses. The policy is approved by the Board of Directors with the
implementation responsibilities delegated to the Asset and Liability Management Committee (the “ALCO”). We seek to
balance the trade-offs between maintaining too much liquidity, which may be costly, with having too little liquidity,
which could cause financial distress. Liquidity risk is centrally managed by the ALCO, which is chaired by our Treasurer
and has cross-functional membership. The ALCO monitors the liquidity risk profiles of DFS and Discover Bank and